GENIUS Act: does exempting synthetic stablecoins open a back door?

The proposed GENIUS Act aims to regulate payment stablecoins by mandating that issuers provide redemption for fixed monetary value, specifically excluding digital assets as redemption vehicles. This legislative framework creates a potential loophole for synthetic stablecoins like Sky’s USDS and Ethena’s USDe, which are not backed by cash or Treasuries. Because USDS allows redemption into USDC rather than fiat currency, it falls outside the bill's definition of a payment stablecoin, thereby exempting its issuer from the proposed regulatory requirements. This distinction raises concerns that the legislation could inadvertently permit the circulation of unregulated foreign or synthetic coins through wrapping mechanisms. By defining redemption strictly as money, the bill attempts to secure the stablecoin market but may simultaneously create a pathway for synthetic assets to bypass oversight. The ambiguity surrounding these definitions is critical for the RWA market, as it dictates which assets will be subject to institutional-grade compliance standards. Ultimately, the GENIUS Act highlights the ongoing tension between defining stablecoins as payment instruments versus synthetic financial products.